With no economic data scheduled in the week ahead, expect Malaysian assets to take cues from global developments in the week ahead amid FOMC and BoJ policy meetings; stay constructive on MYR over the near-term as inflows continue to return to the local markets. Over in Indonesia, BI is likely to keep its policy rate unchanged in the week ahead, and should largely keep its previous rhetoric unchanged despite rising headline inflation, preferring to continue supporting the domestic growth outlook. May trade data is also likely to improve on higher commodity prices and better external conditions y-o-y; Indonesian assets remain attractive on a carry basis.

9 June 2017

Rates & FX Market Weekly

UK’s Hung Parliament to Compound on Brexit Woes

Highlights

Global Markets

¨   The Fed is widely anticipated to raise its interest rate benchmark by 25 bps. As no surprise arose from the latest Fedpseaks coupled with an implied market probability close to 100%, the decision is likely already priced-in, hence containing volatility ahead and post-decision. Looking forward, the feasibility of adding the next policy normalization step by unwinding the Fed’s balance sheet will be greatly discussed among market participants as challenges await in view of a flattening rate curve. Finally, the US-centric political turmoil, global risks and uncertainties continue to underscore our neutral USD and UST stance.

¨   With a hung UK parliament to be expected after Labour performed better than suggested by opinion polls, the range of scenarios have expanded much wider, introducing much uncertainties into the UK’s negotiation strategy, alongside the possibility of another early election under the worst cases if PM May resigns or loses a vote of no-confidence. Key economic data due in the week ahead includes CPI, retail sales, and labour data, although political developments are likely to remain the overarching theme over UK assets in the week ahead. The BoE meeting in the week ahead is unlikely to introduce any fresh insights at this juncture, although the electoral results are likely to complicate the bank’s assumption of a smooth UK exit from the EU; we turn cautious on the GBP over the coming weeks.

¨   In Europe, French voters return to the polls in the first round of the Legislative elections to decide how much control they are willing to give to the new President Emmanuel Macron. The latest opinion polls point towards a possible parliamentary victory for Macron’s République En Marche. At this juncture we do not foresee strong market reactions and continue to eye the stabilization of the EURUSD pair below the 1.1340 resistance and above the 1.1120 support in the short term.

¨   The Bank of Japan also reconvenes to set its monetary policy. We remain in the view that despite recent firming economic numbers, the bank’s QQE is likely to remain unchanged in the medium term as long as inflation remains below the 2% target. That said, the statement will probably be greatly scrutinized for any hints on the prices outlook; the yield curve control to keep JGB yields range bound for the time being.

¨   Key May labour data due will be the focus for Australian watchers in the week ahead, as investors debate the next likely RBA move amid mixed signals from the economy. Given the current backdrop, it would take a material shift in the macro picture in order for RBA to consider changing its Cash Rate (currently 1.50%); we opine for a status quo RBA over the remainder of 2017.

AxJ Markets

¨   Post FOMC rate decision, investors’ focus could turn towards China for hints of tightening measures to mitigate any emergent pressure on net capital outflows, exerting upward pressure on CGB yields over the coming weeks; keep a neutral duration view on CGBs. Meanwhile, China is also due to release the aggregate financing, IP and retail sales prints, where we expect the data to reflect China’s ongoing commitment to mitigate leverage amid the sanguine data prints; shift to a neutral view on CNY, with the USDCNY pair likely to remain below the 7 handle over the coming year.

¨   Elsewhere, the South Korean unemployment rate is likely to reinforce the necessity for labour reforms given the elevated unemployment among the young population; investors to eye pace of fiscal stimulus package disbursement against the backdrop of President Moon’s election promise to create 810k public sector jobs. The key catalyst for KTBs and KRW however, is likely to stemming from the US front, with a less hawkish tone from FOMC likely to support the risk sentiment, favouring KRW assets over the very near term.

¨   Over in Singapore, consensus estimates for May’s NODX remained in the negative territory in spite of a strong expansion expected for the electronics segment. Underlying support from external demand would suggest for the weak prints to be a blip, limiting bearish pressure on SGD over the coming week; position for a gradually tightening SGS-UST spreads over the medium term.

¨   Turning to Thailand, PM Prayuth’s forecast for a stronger GDP expansion in 2018, above the 6-year high of 4%, could seek to cushion the recent outflows from the THB bond market amid the quiet economic calendar; keep a mild underweight duration on ThaiGBs.

¨   With no economic data scheduled in the week ahead, expect Malaysian assets to take cues from global developments in the week ahead amid FOMC and BoJ policy meetings; stay constructive on MYR over the near-term as inflows continue to return to the local markets. Over in Indonesia, BI is likely to keep its policy rate unchanged in the week ahead, and should largely keep its previous rhetoric unchanged despite rising headline inflation, preferring to continue supporting the domestic growth outlook. May trade data is also likely to improve on higher commodity prices and better external conditions y-o-y; Indonesian assets remain attractive on a carry basis.

   

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	Core EGB
Neutral	UST, GILT, ACGB, SGS, CGB, KTB, MGS, IndoGB	USD, EUR, AUD, JPY, MYR, THB, SGD, IDR, CNY, KRW
Mild Underweight	ThaiGB	GBP
Underweight	JGB

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